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Star Gas’ (SGU) CEO Steven Goldman on Q2 2016 Results – Earnings Call Transcript

Star Gas Partners LP. (NYSE: SGU ) Q2 2016 Earnings Conference Call May 05, 2016 11:00 AM ET Executives Chris Witty – Darrow Associates, IR Steven J. Goldman – President and CEO Richard F. Ambury – CFO, EVP, Treasurer Analysts Andrew Elie Gadlin – Odeon Capital Group George Schultze – Schultze Asset Management Operator Hello, and welcome to the Star Gas Partners Fiscal Second Quarter Results Conference Call. [Operator Instructions]. Please note, this event is being recorded. I would now like to turn the conference over to Steven J. Goldman, Star Gas Partners Chief Executive Officer. Please go ahead. Steven J. Goldman Thank you. Good morning, and thank you for joining us today. With me today is Star Gas’ Chief Financial Officer, Rich Ambury. After some brief remarks Rich will review the fiscal second quarter ended March 31, 2016. And we will then take your questions. But before we begin, Chris Witty of our Investor Relations firm, Darrow Associates, will read out the Safe Harbor Statement. Please go ahead, Chris. Chris Witty Thanks, Steve, and good morning. This conference call may include forward-looking statements that represent the Partnership’s expectations and beliefs concerning future events that involve risks and uncertainties that may cause the Partnership’s actual performance to be materially different from the performance indicated or implied by such statements. All statements other than statements of historical facts included in this conference call are forward-looking statements. Although the Partnership believes that the expectations reflected in such forward-looking statements are reasonable, it can give no assurance that such expectations will prove to have been correct. Important factors that could cause actual results to differ materially from the Partnership’s expectations are disclosed in this conference call and in the Partnership’s quarterly reports and annual report on Form 10-K for the fiscal year ended September 30, 2015. All subsequent written and oral forward-looking statements attributable to the Partnership, or persons acting on its behalf, are expressly qualified in their entirety by the cautionary statements. Unless otherwise required by law, the Partnership undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise after the date of this conference call. I’d now like to turn the call back over to Steve Goldman. Steve. Steven J. Goldman Thanks, Chris. First and foremost, I’d like to begin by mentioning how challenging this quarter was due to the extraordinarily warm weather. Last year we had the opportunity to show how well we can perform during very cold weather. Our organization then shined, and we posted record results. But every year, as you know, stands on its own. It should come as no surprise that at the start of each year, our greatest concern is that winter will not provide us the normal cold temperatures we expect and need to perform well. This year, given the circumstances, we needed to demonstrate strong control and the ability to perpetually adjust our plans, as each period of expected cold weather failed to materialize. Because there is always the possibility that temperatures can be rather abnormal, either way, we always plan to service our customer in the coldest as well as the warmest of environments. This past quarter was a period of intense focus and careful decision making designed to achieve the best customer satisfaction and operating results possible. And we really could not be prouder of how well our entire team managed through such challenging conditions. Star Gas continues to push forward to better itself as an organization. We used the past six months to sharpen elements of our strategy to attract and retain a broader customer base through our expanded footprint. We believe that the unusual weather and low oil price also indirectly impacted other aspects of our business. So lack of severely cold weather gave customers less of a reason to leave their current provider and seek higher levels of service we’re known for. And the lower cost of oil gave rise to many extra low price teaser offers in the marketplace, as many competitors became extremely aggressive to try to lure new customers. Under these circumstances, we retained our margin discipline, but attrition did suffer. That said, we continued to work on creating stronger, longer lasting relationships with our customers to help minimize results like this in the future. We are also redoubling our territory expansion efforts, both by organically growing our base, as well as pursuing attractive acquisitions. In addition, we continue to emphasize efforts to broaden the service related area of our business. We see the growth of such services as key to our future success in areas like plumbing, natural gas service, air conditioning, and home security. In the past, these were primarily relationship enhancements to our current fuel customers, but we now see them as revenue opportunities external to our existing account base. We are examining and testing various ways in which to ensure a more durable long-term relationship with homeowners; one that covers a broad spectrum of offerings from propane and home heating oil to these ancillary services, which at times are counter-seasonal to our main business. So while these past six months certainly caused us to adjust some plans for the remainder of this fiscal year, we will not abandon our efforts to enhance our customers’ experience and strengthen Star Gas’ overall performance. The warm weather, which had a negative impact on volume and revenue, drove home the importance of our plans to expand Star’s geographic footprint and the range of service offerings. We are more determined than ever to position our organization for better results going forward by focusing on ways to grow the customers we serve and the ways we serve them. Lastly, Star Gas recently announced that it raised the quarterly distribution to $0.1025 per unit. Based on our never-ending effort to strengthen the business and shareholder value, we believe this increase is part of a rational approach consistent with current and future cash flow expectations. With that, I’ll turn the call over to Rich Ambury to provide some comments on the second quarter results. Rich. Richard F. Ambury Thanks, Steve, and good morning, everyone. For the quarter, our home heating oil and propane volume decreased by 53 million gallons, or 25%, to 157 million gallons as the additional volume provided by acquisitions was more than offset by the impact of warmer weather, net customer attrition, and other factors. Temperatures in Star’s geographic areas of operations for the second quarter were 26% warmer than during the prior year and 12% warmer than normal. The warmer temperatures were a continuation of the weather patterns experienced during the first quarter of fiscal 2016. Also, as a reminder, the second quarter of fiscal 2015 was 19% colder than normal. Our product gross profit declined by $59 million, or 24%, due primarily to the decline in home heating oil and propane volume. Delivery and branch expenses decreased by $16 million, or 15%, as an acquisition-related increase of $3 million was more than offset by a reduction in the base business of nearly $19 million. In the second quarter of fiscal 2016, we recorded a non-cash credit of $14 million for our derivatives. In the prior-year’s comparable quarter, we recorded a similar credit of $13 million. Interest expense decreased $2 million, the result of refinancing $120 million of 8.875% debt with $100 million term loan that was at lower variable rates last year. We posted net income for the quarter of $55 million, or $21 million less than the prior-year period. Adjusted EBITDA decreased to $89 million, down $39.0 million, or 31%, as lower operating expenses were more than offset by the decline in volume driven by 26% warmer weather. For the first half of fiscal 2016, our home heating oil and propane volume decreased by 80 million gallons, or 25%, to 237 million gallons, again, as the additional volume provided by some acquisitions was more than offset by the impact of warmer weather, net customer attrition and other factors. Temperatures in our geographic areas of operation for the first half of fiscal 2016 were 27% warmer than last year’s comparable period and 20% warmer than normal. Our product gross profit declined by 22%, or $82 million, as higher home heating oil and propane margins were more than offset by the decline in home heating oil and propane volumes sold. The continued decline in home heating oil and propane product costs contributed to the expansion in our per-gallon margins. In delivery and branch expenses, we recorded a $12.5 million credit under our weather hedge contract. Outside of this, delivery and branch expenses rose $6 million due to acquisitions, but was reduced by $24 million in response to the warmer weather. Again, we recorded a non-cash credit of $9 million for derivatives. In the prior-year’s comparable period, we recorded a similar credit of $4 million. Interest expense decreased by $3.5 million, again, due to the result of the refinancing that I previously mentioned. We posted net income for the first half of fiscal 2016 of $67 million, or $24.0 million less than in the prior-year period. Adjusted EBITDA decreased to $125 million, down $48 million, or 28%, as the impact of higher home heating oil and propane per gallon margins and lower operating expenses, and the $12.5 million credit recorded under our weather hedge contract was more than offset by the decline in volume driven by 28% warmer weather. Now looking over at our balance sheet, at the end of the quarter, we had cash on hand of $147 million, zero borrowings under our revolving credit facility, and $97.5 million of long-term debt. While we were obviously disappointed with the warm weather, I would like to point out one interesting statistic. For the 12 months ending March 31, 2016, we generated $92.3 million in adjusted EBITDA during a period in which the winter temperatures were 20% warmer than normal. If this had been our year end, this would have been our third best year ever. And with that, I’d like to turn this over to Steve. Steven J. Goldman Thanks, Rich. At this time we’d be pleased to address any questions you may have. Operator, please open the phone lines for questions. Question-and-Answer Session Operator We will now begin the question-and-answer session. [Operator Instructions]. The first question is from Andrew Gadlin with Odeon Capital Group. Please go ahead. Andrew Elie Gadlin Hey, good morning gentlemen. Richard F. Ambury Good morning Andrew. Andrew Elie Gadlin I was wondering if you could talk about some of the acquisitions you announced in the release, that there are two small acquisitions. Richard F. Ambury Yes, those were the same acquisitions that we announced in the first quarter. One was primarily a heating oil business, and another one was in the — down on our southern area and was in the propane business. Andrew Elie Gadlin And could you talk a little bit about valuation? Richard F. Ambury We’ve always said that when we make acquisitions, we try that they’re between 3.5 to 4.5 to 5 times EBITDA. Andrew Elie Gadlin And it was in that range again? Richard F. Ambury Yes. Andrew Elie Gadlin Okay. Thank you very much, gentlemen. Richard F. Ambury Okay. Operator The next question is from Mr. George Schultze with Schultze Asset Management. Please go ahead. George Schultze Hello, gentlemen. How are you? Richard F. Ambury Good George, how are you? George Schultze Good. Thanks for taking my call. I was curious, just looking at your financials and your run rate, LTM run rate of revenues and EBITDA. And I was looking at the June and September quarters of your performance last year. Richard F. Ambury Right. George Schultze For June of 2015 and September. And as you know, those two quarters you had somewhat negative EBITDA. I guess it’s a pretty seasonal business. Do you expect a similar trend this year, or would you expect with the acquisition that you swallowed last year, towards the end of the year to have less negative EBITDA going forward during the off months? Richard F. Ambury Well, we’re not going to project what we anticipate for the next six months. But we are primarily currently a heating oil company. And we generate the majority of our EBITDA, and more than our annual EBITDA in the first six months. And the last six months have always been loss EBITDA, adjusted EBITDA for us. To a certain extent, if we make a heating oil acquisition and we grow the business, the summer losses actually could uptick a little bit as well. George Schultze So you would expect as the business gets larger, that you’ll have even more negative loss or negative EBITDA. Richard F. Ambury That’s — we’re not projecting that, but that’s something you could probably expect, yeah. George Schultze Okay. And in terms of guidance going forward, I know that you generally don’t provide that. I’m not sure why because most companies do these days. But through the end of this year, since we’re already near — it’s just a couple months now to finish the September year — would you expect a similar drop off versus what you’ve had versus last year so far? Or does some of that hedging contract that you had in place, do you expect that some of that will help offset the drop off that we’ve seen due to weather? Richard F. Ambury Well, during the six months, we recorded a $12.5 million credit under our weather hedge contract. We did receive the cash for that. And we don’t have any weather hedge for April through September. George Schultze Okay. So I guess the follow-up question to that then is there anything that can be done at the business to reduce costs even further during these off quarters, in light of how you’re running versus how you were running last year? Steven J. Goldman Well, first let’s start with the last year was an extraordinary unusually unexpected high profit based on the very cold weather, which is certainly not normal, and a declining oil price market, which is relatively not usual as well. So comparing to last year, our normal trends aren’t going to ever follow that unless we have successively very cold years in a row. We always look to counterbalance decreased profitability in the early part of the year, if we’re off where we expect to be internally, with looking at other additional expense cuts or other changes that could help offset that. We are certainly looking at those. How well will they translate into reductions in expense? Depends on a lot of circumstances. There is a weather component of the summer as well that we’re yet to understand how that will unfold. We do a lot of air conditioning service and installation work, and a very hot summer could be opportune for us, and could drive some expense, but some additional net profit. Or if it’s a milder summer, we may be cutting more expense and have less profit than we would hope to have during that period. But we will be working on controlling and reducing expense, certainly, to the foundation of your question. George Schultze Okay. Question about net customer attrition. How were those trends falling this quarter? I didn’t see them in the release from yesterday. Steven J. Goldman They are trending worse than last year for the same period. George Schultze What were the percentage changes? Richard F. Ambury Well, we lost 1.2% of the business this year in the second fiscal quarter. And in the second fiscal quarter of 2016, we lost a net 0.5%. George Schultze Okay. All right, thanks. And I just have one last question. Thanks for taking my questions. It looks like on the balance sheet you have almost $150 million of cash now, if I’m reading it correctly. What can be done with that cash to make it more productive for the benefit of shareholders? Steven J. Goldman We are — one thing that we are working on as always, we are in discussions with several acquisitions. And we are hoping at least some of them in the coming months we’ll be able to execute on. And that — to us, that’s one of the best uses of that cash, as we always say. Because not only do we try to buy stuff that’s accretive to the business that’ll give return, but it also strengthens the durability of the business for the long-term investor. We are also looking at some other smaller things that we can do. Rich. Richard F. Ambury And when you look at the cash we have about 37%, 38% of our customers are in a budget payment plan. And to a certain extent they really — they paid a little bit more into that plan this year because of the 20% warmer weather. In addition to that, we had significantly declining cost of product. And if cost of product went back from let’s say $1.20 to $3.25, there would be a significant need for the equity cash that we would have to supply for the increase in our receivables. So we’re enjoying — to a certain extent, we’re enjoying a benefit of abnormally low receivables due to one, warm weather; two, customer credit balances; and three, low prices. George Schultze Okay. Is the stockholder or the stock repurchase plan, is there any active stock repurchase plan, or has that expired or been fully expensed? Richard F. Ambury It’s still active. George Schultze I’m sorry. You said it’s still active. I forget what the size of it, if you could just clarify, and then I’ll be out of the queue. Thanks again for all the questions here. Richard F. Ambury Sure. The balance is — let me just look it up for you. We got about 2.2 million of share, or units, rather, that we can still repurchase. George Schultze Okay. Thank you. Steven J. Goldman You’re welcome. Operator [Operator Instructions]. There are no more questions. This concludes our question-and-answer session. I would like to turn the conference back over to Mr. Goldman for any closing remarks. Steven J. Goldman Thank you. Again, thank you for taking the time joining us today and for your ongoing interest in Star Gas. We look forward to sharing our third-quarter 2016 results with you in August. Operator The conference has now concluded with this. Thank you for attending today’s presentation. You may now disconnect. Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) 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Exelon (EXC) Christopher M. Crane on Q1 2016 Results – Earnings Call Transcript

Exelon Corp. (NYSE: EXC ) Q1 2016 Earnings Call May 06, 2016 11:00 am ET Executives Dan L. Eggers – Senior Vice President-Investor Relations Christopher M. Crane – President, Chief Executive Officer & Director Jonathan W. Thayer – Chief Financial Officer & Senior Executive VP Joseph Nigro – Executive Vice President, Exelon; Chief Executive Officer, Constellation, Exelon Corp. Analysts Steve Fleishman – Wolfe Research LLC Jonathan Philip Arnold – Deutsche Bank Securities, Inc. Julien Dumoulin-Smith – UBS Securities LLC Praful Mehta – Citigroup Global Markets, Inc. (Broker) Operator Good morning and welcome to the Exelon Corporation’s Q1 2016 Earnings Conference Call. My name is Prasanthi and I’ll be facilitating the audio portion of today’s – and active broadcast. All lines have been placed on mute to prevent any background noise. For those of you on this stream, please take note of the options available in your event console. At this time, I would like to turn the show over to Dan Eggers, Senior Vice President of Investors Relations. Dan L. Eggers – Senior Vice President-Investor Relations Thank you, Prasanthi. Good morning, everyone, and thank you for joining our first quarter 2016 earnings conference call. Leading the call today are Chris Crane, Exelon’s President and Chief Executive Officer; and Jack Thayer, Exelon’s Chief Financial Officer. They are joined by other members of Exelon’s senior management team who will be available to answer your questions following our prepared remarks. We issued our earnings release this morning along with the presentation, both of which can be found in the Investor Relations section of the Exelon’s website. The earnings release and other matters which we discuss during today’s call contain forward-looking statements and estimates that are subject to various risks and uncertainties. Actual results could differ from our forward-looking statements based on factors and assumptions discussed in today’s material, comments made during this call, and our Risk Factors section in the earnings release, and the 10-Q, which we expect to file on May 10. Please refer to today’s 8-K, the 10-Q, and Exelon’s other filings for a discussion of factors that may cause results to differ from management’s projections, forecasts and expectations. Today’s presentation also includes references to adjusted operating earnings and other non-GAAP measures. Please refer to the information contained in the appendix of our presentation and our earnings release for a reconciliation between the non-GAAP measures to the nearest equivalent GAAP measures. We’ve scheduled 45 minutes for today’s call. I’ll now turn the call over to Chris Crane, Exelon’s CEO. Christopher M. Crane – President, Chief Executive Officer & Director Good morning. Thanks for joining us this morning. Once again we had a great quarter financially, where we closed near the upper end of the range even with the milder weather. And operationally, our utilities and plants continue to operate at high levels. The big news for the quarter is we closed the Pepco Holdings transaction in March. We are excited to have Pepco utilities as part of the Exelon family. We know this has been a long journey and it took much longer than any of us anticipated, but we appreciate the patience of our investors as we pursued the merger. Our employees who worked tirelessly from the inception to the completion of the deal and the many stakeholders who’ve supported was critical to getting the deal done. PHI is an important piece of our strategy to become a more regulated company with more stable earnings streams. While we are still in the early stages of integrating PHI, PHI’s earnings outlook is consistent, if not better, than what we showed you at EEI. It brings meaningful benefits to our customers, communities in Delaware, District of Columbia, Maryland, New Jersey, including bill credits and reliability investments. More than $500 million in total commitments have been made and will be achieved due to this merger. We’re now focused on integrating Pepco into Exelon. We will bring our management model and our best practices to improve the experience of our customers. The transaction confirms Exelon’s role as a leader in the industry. We serve 10 million customers, more than any other utility company. We will spend nearly $23 billion in capital across our utilities and generating business over the next three years, which is the second-highest among our peers. We are the largest pure T&D by rate base and within the top five when including rate base generation. We are the second-largest generator of electricity in the country, the largest competitor by a factor of nearly two, while producing power at the lowest carbon intensity of any large generator. We are the leader in the retail electric provider in the country serving 139 terawatts. The culture of the industry leadership is found throughout our organization, positioning us very well for the future. Switching to operational performance. Our first quarter operating performance was strong and we’re on track for a strong year. At our legacy utilities, our SAIFI and CAIDI are on track to meet reliability targets; we are in top quartile in both. At the GenCo, our nuclear plants ran at a capacity factor of 95.8%, our solar and wind assets outperformed their energy capture targets. Switching to Illinois in the nuclear plants. While there is much to celebrate this quarter, we also need to make tough decisions on the future of Clinton and Quad Cities nuclear stations in Illinois. The board has given me authority to go forward with early retirements for Clinton and Quad Cities plants, if for Clinton adequate legislation is not passed during the spring legislative session that is scheduled to end May 31, and if for Quad Cities adequate legislation is not passed and the plant does not clear the upcoming PJM auction. Otherwise, we plan to retire Clinton on June 1, 2017, and Quad Cities on June 1, 2018. This is consistent with planned refueling outage and capacity market obligations. We committed to our employees, our shareholders and the communities to try to find a path to profitability for our distressed assets. This is because these plants are vital to the communities that they are located in and provide economic and environmental value to the state. The state’s own analysis showed that closing Clinton and Quad Cities would result in $1.2 billion in lost economic activity and 4,200 jobs lost, and a significant reduction of supply of reliable electricity for Illinois residents and businesses. We worked hard over the last few years to find a path to sustainable profitability. To bring $120 million in strategic capital to these plants, we’ve pursued legislation and regulatory market changes. We’ve been successful in some areas: the PJM market reforms that were put into place last year, the cost reductions that we’ve achieved, and the large number of stakeholders who have worked so hard to help in this fight. We have strong allies in our cause, our employees, our plant communities, the bill sponsors and co-sponsors, our partners in labor, and our vendors among others. I want to thank them all very much for their support and regret the impact on this decision that we have on them. But for reasons outside of our control, we have not seen progress in Illinois policy reforms, also the Supreme Court stay creates uncertainty regarding the EPA’s Clean Power Plan. Power prices have fallen to a 15-year low in PJM, causing the economics of Clinton and Quad Cities to further deteriorate. These plants have lost $800 million in cash flow from 2009 to 2015. Just to be clear, we are not covering our operating costs or our risks, let alone receiving a return on our invested capital. We’ve done all we can up to this point and we continue to work through the spring legislative session to enact the much needed reforms. However, without adequate legislation we no longer see a path to profitability and no longer can sustain the ongoing losses. On a more positive note, we continue to see a pathway to reform in New York where Governor Cuomo, the legislature, the Public Service Commission have recognized a need to preserve the state’s nuclear plants. New York is quickly moving forward to implement a clean energy standard that will allow us to continue to operate our challenged Ginna and Nine Mile plants. I’ll turn the call over to Jack to discuss the first quarter results further. Jonathan W. Thayer – Chief Financial Officer & Senior Executive VP Thank you, Chris, and good morning, everyone. My remarks today will cover our first quarter results, 2016 guidance, update our gross margin disclosures and provide an update on developments since Q4. I’ll start on slide eight. As Chris stated, we had a strong quarter financially and operationally across the company. For the first quarter we delivered adjusted non-GAAP operating earnings of $0.68 per share, near the top of our guidance range of $0.60 per share to $0.70 per share. This compares to $0.71 per share for the first quarter of 2015. Exelon’s utilities delivered a combined $0.37 per share. During the quarter, we saw unfavorable mild weather at PECO and ComEd versus planned, which was partially offset by lower bad debt expense at BGE. There are only eight days of PHI included in our results, which had a minimal impact on the quarter. Generation had a great quarter, earning $0.34 per share. We had strong performance from our nuclear assets with better capacity factors than budgeted. And while weak power prices and lower volatility were a drag, our Constellation team delivered strong results. Our generation to load matching strategy continues to provide value and we benefited from a lower cost to serve our customers. For the second quarter, we are providing guidance of $0.50 to $0.60 per share. This compares to our realized earnings of $0.59 per share for the second quarter of 2015. The appendix contains details on our first quarter financial results compared to the first quarter of 2015 results by operating company on slide 16 and 17. Turning to slide nine, we are affirming our full-year guidance range of $2.40 to $2.70 per share which now includes the contribution from PHI and assumes an average of 926 million shares outstanding for 2016. This should help calibrate your segment models. On slide 10, we are still working through a comprehensive financial plan now that we have closed the PHI deal, but want to address the pieces that we can today. We are reaffirming our earnings growth at our legacy utilities of 7% to 9% per year from 2015 to 2018. On PHI, we are still working through the plan, but see the contribution equal to or better than what we showed you at EEI and consistent with sustaining our 7% to 9% utility growth target. On slide 11, to meet these growth targets we are going to be busy on the regulatory front. The PHI utilities have been out of rate cases for at least two years. We are continuing to invest $800 million per year to improve reliability and customer service leading to the low-earned ROEs that we show on slide 30 in the appendix. However, by the third quarter, we plan to file distribution cases in all of PHI’s jurisdictions and expect decisions in all cases by the middle of next year providing needed revenue release. Atlantic City Electric and Pepco Maryland have already filed their cases. ACE filed an electric distribution base rate case on March 22 with the New Jersey Board of Public Utilities requesting an $84 million revenue increase and a 10.6% return on equity. It also included PowerAhead, a five-year $176 million grid resiliency plan. On April 19, Pepco requested a rate increase of $127 million with the Maryland’s Public Service Commission. The rate cases include smart meter recovery and a two-year $32 million grid resiliency plan. In addition to reducing the number and length of outages, Pepco’s five-year smart grid program is generating nearly $4 in customer benefits for every $1 invested. In addition, ComEd made its annual formula rate filing with the Illinois Commerce Commission. ComEd requested a revenue requirement increase of $138 million reflecting approximately $2.4 billion in capital investments made in 2015. Those investments, which included $663 million for smart grid-related work has helped strengthen and modernize the electric system, resulting in record power reliability and customer satisfaction, operational savings, and new ways to save on electric bills for ComEd customers. More details on the rate cases can be found on slide 33 – slides 34 through 37 in the appendix. Slide 12 provides our first quarter gross margin update. In 2016 total gross margin is flat to our last disclosure. During the quarter we executed on $200 million of power new business and $100 million of non-power new business. We are highly hedged for the rest of this year and well-balanced on our generation to load matching strategy. Total gross margin decreased in the first quarter by $150 million in 2017 and $200 million in 2018, as PJM power prices moved approximately $1.60 to $2.10 lower since the beginning of the year. We ended the quarter approximately 5% to 8% behind ratable in both of these years when considering cross-commodity hedges with a majority of modeling concentrated in the Midwest to align to our fundamental view of spot market upside at NiHub. Power prices have risen since the start of the second quarter and we are timing our hedging activity to lock in the value of the recent price increases while remaining well positioned to capture our fundamental view. On slide 13, I wanted to give you a quick update on some tax implications that are associated with the completion of the PHI merger. With the inclusion of PHI, we expect to realize $700 million to $850 million of additional cash from 2017 to 2019 related to legacy NOLs and the impacts of bonus depreciation. However, now, as a very modest cash tax payer for 2018, we have less ability to take the domestic production activities deduction, or DPAD, in 2018 which effectively increases our overall consolidated tax rate by as much as 200 basis points or the equivalent of $0.06 to $0.08 per share in 2018. Although this is a one-time negative impact to 2018 ExGen earnings, it comes with significant positive cash flow and we expect to return to normalized tax rates in 2019. With the variability of interest rates, I’d like to remind you that ComEd’s allowed ROE is based on a 30-year treasury rate plus 580 basis points, and thus sensitive to moves in this rate. Every 25 basis point move in treasury rates results in a $0.01 move in EPS. Before turning the call over to Chris, I wanted to raise a few scheduling points. We’ll be hosting an Analyst Day on August 10 in Philadelphia and we’ll get details around shortly. Therefore, we will not be having a second quarter earnings call and will release earnings before Analyst Day. I will now turn the call back to Chris for his closing remarks. Christopher M. Crane – President, Chief Executive Officer & Director Thanks, Jack. Just closing out on slide 14, the capital allocation philosophy. I want to cover that before we turn it over to Q&A, and take a moment to reiterate our capital allocation philosophy. Balance sheet strength remains a top financial priority. We have a strong strategy to deliver stable growth, sustainable earnings, and an attractive dividend to our shareholders. We will be growing that dividend at 2.5% each year for the next three years, starting with the dividend payable in June. From a capital deployment perspective, we will continue to harvest free cash flow from the generation business to invest primarily in our utilities to benefit our customers, invest in long-term contracted assets which meet our return requirements, and return capital to our shareholders. This is the right strategy for our markets and our assets. Thanks and we’ll open the line up now for your questions. Question-and-Answer Session Operator And we do have audio question from Stephen Byrd (17:13). Christopher M. Crane – President, Chief Executive Officer & Director Hey, Steve (17:15). Unknown Speaker Start on the Illinois legislation. And wonder if you could speak to the breadth of support that you have for the proposal. And then also if you could just go through the mechanics of if it was implemented, how it’d work? So we can start to think about modeling the impacts. Christopher M. Crane – President, Chief Executive Officer & Director Joe, you want to cover that? Joseph Nigro – Executive Vice President, Exelon; Chief Executive Officer, Constellation, Exelon Corp. Sure. Steve (17:36), the support is the same support we had for the original bill, labor, the host communities. And in addition, we now have the support of some groups that represent climate scientists and others that are concerned with greenhouse gas emissions. In terms of how the program would work, let me just start with a policy analogy that I think all of you are familiar with. Existing state RPS programs for renewables provide compensation of qualified resources through renewable energy credits, RECs. The REC value is the difference between available wholesale revenues and the costs needed to keep the existing renewables in operation and get new renewables built. All this is done in order to get the benefit of greenhouse gas reductions while protecting customers. If wholesale revenues go up, the needed REC payment goes down. We see that happening every day in REC spot markets. The ZEC program is designed the same way. It’s a payment for the state value of zero emission credits from nuclear plants which represents the difference between the needed revenues and the costs of operating the plants. In the case of the New York and Illinois programs, the way it would work is that experts at the Commissions will determine on a prospective basis the cost of operating the plants plus risks, less available market revenues. And where there is a delta between that, in other words where the costs and risks are not covered by available market revenues, the ZEC program will kick in and provide compensation for greenhouse gas avoidance. The program is not a PPA or a contractor difference. If revenues or costs are different, there is no true-up. And – so, Steve (19:26), I think if you have additional questions, perhaps after the call we could work with Dan and Emily to set up a meeting, go through more programmatic details. Unknown Speaker That’s great. That’s a great start. Thank you. And then just shifting over to renewables more broadly, could you just speak to your degree of appetite for more acquisitions? It sounds like you’ll be a full taxpayer, I believe, in 2019, if I have that correct. But just broadly, what degree of opportunities do you see out there in renewables? Is this an area that you would expect that you’ll see further growth in? Christopher M. Crane – President, Chief Executive Officer & Director It is definitely throttled based off of our tax capacity and we are looking at that now. You do get a certain amount of dilution with delaying the benefits of the tax attributes of the project, so we have some projects in the pipeline now and are re-evaluating others to see if they’re – they would be viable to go forward in the near-term. Unknown Speaker Understood. Thank you very much. Operator And your next question comes from the line of Steve Fleishman. Christopher M. Crane – President, Chief Executive Officer & Director Hi, Steve. Steve Fleishman – Wolfe Research LLC Hi. Good morning. A couple of – first, a logistical question. The Ginna $101 million that you mentioned that you’re getting, is that – is kind of a trued-up amount including past years, is that in your guidance for this year? Or is that kind of like a one-time item or how are you treating that? Jonathan W. Thayer – Chief Financial Officer & Senior Executive VP Steve, that’s in our guidance. Steve Fleishman – Wolfe Research LLC Okay. Including any back from prior periods? Jonathan W. Thayer – Chief Financial Officer & Senior Executive VP That’s correct. Steve Fleishman – Wolfe Research LLC Okay. And then a question just – is there any way you can give us some sense on the cash flow or losses from Clinton and Quad Cities, let’s say, in your guidance for last year or something of that sort? Jonathan W. Thayer – Chief Financial Officer & Senior Executive VP So we’ve stated that it’s greater than $800 million since 2009. There are some variables in there on cash savings going forward or cash losses going forward, power prices coming down, cost cutting initiatives; and we do have an element of overheads that would not be as controllable. So you would see the run rate to be similar to what has happened in the past. Steve Fleishman – Wolfe Research LLC Okay. Christopher M. Crane – President, Chief Executive Officer & Director Steve, you know, on this point – so for 2017, the cost exceeded available market revenues or at current marks (22:12) by $140 million. But I think importantly and Joe raised this point, it’s not the whole picture. The closure also avoids millions of dollars in basis and unit-contingent risks that we face by operating the plants. And stated differently, in order to reverse course we need Illinois as well as New York to provide a structure that allows us to cover our cash costs plus normal operating risks in order to reverse this course. Steve Fleishman – Wolfe Research LLC Okay. And $140 million that’s kind of cash flow? Does that include like CapEx, or is that just kind of cash flow without CapEx? Christopher M. Crane – President, Chief Executive Officer & Director That’s cash flow. Steve Fleishman – Wolfe Research LLC Okay. One last question just on the – in the event legislation doesn’t happen and you need to shut the plants, what – is there any cost related to that? Jonathan W. Thayer – Chief Financial Officer & Senior Executive VP As you saw in the K, and we reiterate in the Q, there is some unfunded liabilities on the decommissioning trust. Those numbers are in there at full 100% ownership of the plants. And so the way that we would have to handle that is – you know, you can start out with parent guarantees, but you have to have it funded over a 10-year period, I think 60% by the end of the fifth year, and then the rest by the end of the 10 years. Steve Fleishman – Wolfe Research LLC Okay. Those numbers in the K are still good then, so that we just can use those? Jonathan W. Thayer – Chief Financial Officer & Senior Executive VP They’re updated in the Q. Christopher M. Crane – President, Chief Executive Officer & Director That’ll be coming Tuesday. Steve Fleishman – Wolfe Research LLC Okay. Thank you. Operator And your next question comes from the line of Jonathan Arnold. Jonathan Philip Arnold – Deutsche Bank Securities, Inc. Hey, good morning, guys. Christopher M. Crane – President, Chief Executive Officer & Director Good Morning. Jonathan W. Thayer – Chief Financial Officer & Senior Executive VP Good Morning. Jonathan Philip Arnold – Deutsche Bank Securities, Inc. Just to clarify one thing on the current proposal that I think was emerged last night around the legislation. So originally this applies to all nuclear plants in the state, but is it correct that this would just be Clinton and Quad? And can you just explain how that works in terms of the discussion of the ZEC structure? Christopher M. Crane – President, Chief Executive Officer & Director Joe? Joseph Nigro – Executive Vice President, Exelon; Chief Executive Officer, Constellation, Exelon Corp. Sure. Jonathan, all plants could apply, but quite obviously the only plants that would receive revenue under this program would be those where the costs exceed the revenues. And so there is – it’s a 20 terawatt-hour cap which has enough room in it to accommodate Clinton and Quad Cities. And our expectation is that Exelon would seek to have those two plants participate. The other plants would not participate. Jonathan Philip Arnold – Deutsche Bank Securities, Inc. Okay. And that’s sort of nuanced in how the legislation’s worded effectively? Joseph Nigro – Executive Vice President, Exelon; Chief Executive Officer, Constellation, Exelon Corp. That’s correct. Jonathan Philip Arnold – Deutsche Bank Securities, Inc. Okay. Joseph Nigro – Executive Vice President, Exelon; Chief Executive Officer, Constellation, Exelon Corp. It’s the same offer to you, Jonathan; if you’d like, after the call, we could sit down and work through some of the details. Jonathan Philip Arnold – Deutsche Bank Securities, Inc. Okay. That’ll be great. And is there any… Christopher M. Crane – President, Chief Executive Officer & Director And, Jonathan, just to interject just to make the clear point, they would provide the opportunity to be compensated for cost plus risk. Jonathan Philip Arnold – Deutsche Bank Securities, Inc. Okay. That was one thing. The second thing, in your fourth quarter deck, you have this forecast around leverage ratios and the like going out through 2018, which, I believe, was assuming that Pepco would not happen. This was of the ExGen. Can you give us a sense of how that progression would look if you kind of market to the – with Pepco scenario? Jonathan W. Thayer – Chief Financial Officer & Senior Executive VP Sure. So, Jonathan, we still anticipate reducing leverage of ExGen by $3 billion over the five-year planning period, albeit this is not to the extend that we would have under the standalone scenario, because ExGen’s free cash flow is now being deployed to help fund PHI’s capital spending program. And we’ll provide more detail on the puts and takes of that at the Analyst Day in August. Jonathan Philip Arnold – Deutsche Bank Securities, Inc. So $3 billion is kind of the new ExGen delevering number? Jonathan W. Thayer – Chief Financial Officer & Senior Executive VP That’s right. That’s over the next five years, we have a large maturity. And I believe it’s 2019, that we would look to retire at maturity. Jonathan Philip Arnold – Deutsche Bank Securities, Inc. Okay. So that’s over five years? Jonathan W. Thayer – Chief Financial Officer & Senior Executive VP That’s correct. Jonathan Philip Arnold – Deutsche Bank Securities, Inc. And then the 2.3 ExGen debt-to-EBITDA that you were looking at for 2018, roughly what does that look like now? Jonathan W. Thayer – Chief Financial Officer & Senior Executive VP It, over the five-year period, would go to right around three times. Jonathan Philip Arnold – Deutsche Bank Securities, Inc. So that’s again over five years, rather than three years? Jonathan W. Thayer – Chief Financial Officer & Senior Executive VP That’s correct. Jonathan Philip Arnold – Deutsche Bank Securities, Inc. Okay, great. Thank you. And then I guess you mentioned in the prepared remarks the prices have rebounded… Jonathan W. Thayer – Chief Financial Officer & Senior Executive VP So, Jonathan – sorry, just let me correct, 2.7 times at the end of the five-year period. Jonathan Philip Arnold – Deutsche Bank Securities, Inc. So whereas you have 2.3 times in 2018, it’s now 2.7 times after five years? Jonathan W. Thayer – Chief Financial Officer & Senior Executive VP Yes. Jonathan Philip Arnold – Deutsche Bank Securities, Inc. Okay, great. Thank you. And then you mentioned that prices have rebounded. So can you give us a rough sense of how the kind of gross margin mark would look if you use more like today’s prices? Joseph Nigro – Executive Vice President, Exelon; Chief Executive Officer, Constellation, Exelon Corp. Yeah. Jonathan, good morning. It’s Joe Nigro. I think if you look at our hedge disclosure at the end of the quarter and then factor in the changes since the end of March, you would see all of that drop in 2017 and 2018 being recovered. We’ve seen an appreciable move, as you know, in prices since the end of March. We’re actually higher in NiHub than we were at the end of the year. We’re higher at West Hub than we were at the end of the year, so we would have recovered all that drop and probably adding to it. We calculated that a couple of days ago, but the market has continued to move higher, so we probably have seen it actually go over where it ended the quarter. Jonathan Philip Arnold – Deutsche Bank Securities, Inc. Great. Okay. That’s it. Thank you very much, guys. Christopher M. Crane – President, Chief Executive Officer & Director Thanks. Operator And your next question comes from the line of Julien Dumoulin-Smith. Julien Dumoulin-Smith – UBS Securities LLC Yeah. Hi. Good morning. Christopher M. Crane – President, Chief Executive Officer & Director Good morning. Julien Dumoulin-Smith – UBS Securities LLC So perhaps to follow up on the same theme, can you elaborate a little bit on the balance of the nuclear portfolio that is ex-Clinton, ex-Quad? How you think about their cash flow profile? And if you don’t get this legislation, what the prospects are for further rationalization? I don’t mean to jump the gun too much here, but just talking about the future a little bit more? Christopher M. Crane – President, Chief Executive Officer & Director So there’s varying cash flows by assets depending on their location. They are positive at this point. If you look at the other units that are more challenged, you’re looking at Ginna and Nine Mile. One – we know about Oyster Creek and it’s coming up in 2019, the other one that has a real focus on it right now is Three Mile Island. Julien Dumoulin-Smith – UBS Securities LLC Got it. And specific to Illinois, is there any commentary around – so let’s say we don’t get it in 2016 or 2017, does that trigger another set of reviews? Again, not to push it too much. Christopher M. Crane – President, Chief Executive Officer & Director At this point we’ll have to watch the capacity auction clearing in the out years. It’s tight on energy at some of the assets, but they are positive. Julien Dumoulin-Smith – UBS Securities LLC Got it. Okay, great. And then turning back to the utilities real quickly, can you comment, or I’m curious, if you will, what the earned ROEs embedded at Pepco for 2016 – just what’s the baseline on the Pepco side as far as you see it post the close? Jonathan W. Thayer – Chief Financial Officer & Senior Executive VP Julien, in terms of – I think we included it on slide, I believe it’s 30, the earned for 2015. Obviously, while we’re in the pendency period during the rate cases that – obviously, there’s regulatory lag, so we’re going to see that decline, but we’ll have a much deeper dive in the PHI as part of the August 10 meeting. You can see on slide 29 the rate base statistics and I think can work through some assumptions on regulatory lag using that information. Julien Dumoulin-Smith – UBS Securities LLC Got it. And perhaps not to jump the gun too much on the Analyst Day, but what is the thought process on the baseline for a future regulated CAGR? Jonathan W. Thayer – Chief Financial Officer & Senior Executive VP I think the thought is the 7% to 9% that we confirmed on the call and PHI is absolutely consistent with that expectation. We, as we mentioned, are seeing improvement relative to what we forecasted or projected at EEI using PHI’s internal forecast. And Dennis and team continue to work to identify further opportunities around efficiency as well as regulatory policy to work to get those earned and allowed ROEs in line with the success we’ve experienced within Maryland, Pennsylvania and Illinois. Julien Dumoulin-Smith – UBS Securities LLC Got it. You wouldn’t roll it forward though? Jonathan W. Thayer – Chief Financial Officer & Senior Executive VP I’m not certain I understand what do you mean roll it forward? Julien Dumoulin-Smith – UBS Securities LLC The 7% to 9%, just roll it forward to CAGR off a 2016 base? Christopher M. Crane – President, Chief Executive Officer & Director We’ll address that at the Analyst Day. Julien Dumoulin-Smith – UBS Securities LLC All right. No worries. Thank you. Christopher M. Crane – President, Chief Executive Officer & Director I mean, embedded in there is 7% to 9% through 2018, so just thinking it through, it’s in there. Julien Dumoulin-Smith – UBS Securities LLC Got it. Thank you. Operator And your next question comes from the line of Brian Chen (32:25). Christopher M. Crane – President, Chief Executive Officer & Director Hey, Brian (32:30). Unknown Speaker Going over to slide 13, the EPS impact that you’ve laid out in that top table, I just want to verify that that is not including the use of capital from that positive cash flow impact that you’ve got on the second row right? Christopher M. Crane – President, Chief Executive Officer & Director That’s right, Brian (32:46). Unknown Speaker Okay. Great. And then I just want to verify that Quad Cities didn’t clear in the 2018 and 2019 auction, correct? So the closure of Quad Cities shouldn’t have any sort of residual obligation that you have for the 2018, 2019 capacity through (33:03)? Christopher M. Crane – President, Chief Executive Officer & Director That’s correct. Unknown Speaker Great. Thanks a lot. Operator And your next audio question comes from Praful Mehta. Praful Mehta – Citigroup Global Markets, Inc. (Broker) Hi, guys. Christopher M. Crane – President, Chief Executive Officer & Director Good morning. Praful Mehta – Citigroup Global Markets, Inc. (Broker) Good morning. So just on the leverage a little bit, just to ensure we understand both at the holding company level and at ExGen. You’ve kind of talked about the ExGen debt and what you see over the 20 – the five year period. How are you looking at holding company debt given the leverage you’ve assumed post Pepco transactions? Is there any objective to delever a little bit at the holding company as well? Jonathan W. Thayer – Chief Financial Officer & Senior Executive VP So Praful, as you’ve heard us comment in the past, we do target at 20% FFO to debt on a consolidated basis and that was one of the benefits of adding PHI to the Exelon family. And so we will certainly be looking at our leverage ratios at the GenCo. I think you’ll also see us consider to the extend we have available cash at the holding company as well, we just need to see as we get further out what the realized power prices are and what the free cash flow coming off of the GenCo is in those five years. Praful Mehta – Citigroup Global Markets, Inc. (Broker) Got you. And just so if you think about from the sources/uses perspective, the source is primarily out of ExGen coming to fund CapEx at the utilities and then deleveraging both at ExGen and the parent. Is that a fair way to think of it or is there some cash generation coming out of the utilities as well over the next two year, three year period? Jonathan W. Thayer – Chief Financial Officer & Senior Executive VP I would say, on a net basis, utilities are consumers of cash. So you’re correct. That ExGen cash flow as well as debt raise at the utilities is the primary source for funding the significant CapEx that we see, $25 billion over the next five years at the utilities. Praful Mehta – Citigroup Global Markets, Inc. (Broker) Got you. Thank you. And then just finally, we saw that the power new business and the to-go business, the EBITDA, or the growth margin of that is going from $250 million in 2016 up to about a $1 billion by 2018. Could you just give us a little bit of context of what’s driving that significant ramp-up in that side of the business? Joseph Nigro – Executive Vice President, Exelon; Chief Executive Officer, Constellation, Exelon Corp. Yeah. Hi. It’s Joe Nigro. That’s pretty standard shape that we have. If you go back and look at disclosures over the years, you would expect to see much less new business in the prompt years – in the prompt year, in this case 2016, than you would in the out years, for example, in 2017 and 2018. Embedded in that power new business is things like the execution of our retail business and the margins associated with that. So as we get closer to the swap period more and more of those contracts get layered in, we begin to reduce that bucket of power new business. I mean, there’s other elements of our business that follow that same timing shape, so this isn’t unique in the sense of seeing a ramp up between the prompt year to two years forward and we’re very comfortable with the numbers that we’ve put out there. Praful Mehta – Citigroup Global Markets, Inc. (Broker) Got you. Thank you so much guys. Operator And this does conclude today’s conference call. You may now disconnect. Christopher M. Crane – President, Chief Executive Officer & Director Thank you. 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Atlantic Power’s (AT) CEO Jim Moore on Q1 2016 Results – Earnings Call Transcript

Atlantic Power Corporation (NYSE: AT ) Q1 2016 Earnings Conference Call May 06, 2016 08:30 AM ET Executives Edward Vamenta – Director of Financial Planning and Analysis Jim Moore – President and CEO Terry Ronan – CFO Dan Rorabaugh – SVP of Asset Management Analysts Rupert Merer – National Bank Sean Steuart – TD Securities Ben Pham – BMO Operator Good morning, and welcome to the Atlantic Power Corporation First Quarter 2016 Results Conference Call. All participants will be in listen-only mode. [Operator Instructions] Please note, today’s call is being recorded. I would now like to turn the conference over to Edward Vamenta, Director of Financial Planning and Analysis. Please go ahead. Edward Vamenta Welcome, and thank you for joining us this morning. Our results for the three ended March 31, 2016 were issued by press release yesterday afternoon and are available on our website www.atlanticpower.com and on EDGAR and SEDAR. The accompanying presentation to today’s call and webcast can be found in the Investor Relations section of our website. A replay of today’s call will be available on our website for a period of one year. Financial figures that we’ll be presenting are stated in U.S. dollars and are approximate unless otherwise noted. Please be advised that this conference call and presentation will contain forward-looking statements. As discussed in the company’s Safe Harbor statement on page 2 of today’s presentation, these statements are not guarantees of future performance and involve certain risks and uncertainties that are more fully described in our various securities filings. Actual results may differ materially from such forward-looking statements. In addition, the financial results in yesterday’s press release and today’s presentation include both GAAP and non-GAAP measures including project adjusted EBITDA, adjusted cash flows from operating activities, and adjusted free cash flow. For a reconciliations of these measures to the most directly comparable GAAP financial measures to the extent they are available without unreasonable effort, please refer to the press release, the appendix of today’s presentation, or our quarterly report on Form 10-Q, all of which are available on our website. Now I will turn the call over to Jim Moore, President and CEO of Atlantic Power. Jim Moore Good morning. With me this morning are Terry Ronan, our CFO; and Dan Rorabaugh, our Senior Vice President of Asset Management, as well as several other members of the Atlantic Power management team. In terms of this morning’s agenda, first I will recap recent progress, then Dan will review plant operating performance and provide an update on our capital expenditures. Terry will review the first quarter financial results, discuss the recent refinancing transaction, and provide an update to our 2016 guidance. I will wrap up the call with additional comments on strategy. As shown on slide 4, so far this year, our plants performed well and financial results for the first quarter were in line with our expectations. We have continued to repay debt using our strong operating cash flow. We also opportunistically repurchased convertible debentures and common shares under the NCIB. Just a little over three weeks ago, we closed a significant refinancing of both our term loan and revolving credit facility, although this a difficult significant market environment in which undertaking this transaction, we are pleased to have completed it. And our view of the positive aspects of this transaction outweigh the higher interest rate. Pro forma for the planned redemptions of our 2017 convertibles later this month, we have no corporate debt maturities prior to 2019. We also have a $105 million of remaining proceeds to further reshape our balance sheet and invest in growth. In addition, our new $200 million corporate revolver provides us with greater flexibility to finance growth or additional debt repurchases. Lastly, the pending shareholder asset in Quebec was dismissed in April with no payments by us consistent with the resolution of the US and Ontario actions earlier. This brings to a close all outstanding shareholder litigation. Now, I will turn the call over to Dan. Dan Rorabaugh Thanks, Jim and good morning everyone. Slide 5 summarizes our operational performance for the first quarter of 2016. This quarter we have added a report on safety to our operations reviews, where safety of our plants and our people is a high priority at Atlantic Power. Although we have a strong track record, we are continually striving for even better performance. This quarter we had one recordable incident in early January, but none in the four months since then. In comparing our results for the industry average, keep in mind that the average includes much larger companies for which the rate tends to be lower. Our loss time injury rate which we’ve not shown in the chart is typically lower than the industry average. I’d also note that we didn’t have any environmental or regulatory violations during the quarter. Our availability factor in the first quarter of 2016 was 96.6% versus 97.5% for the comparable period a year ago. The slight increase was due to maintenance outages at our three Navy plants and a utility requested outage at Naval training center. The impact of these outages on availability was partially offset by improved availability at Mamquam and Piedmont, both of which had scheduled maintenance outages in the prior period. Generation increased 4.4%, primarily due to Frederickson, which had increased dispatch and Curtis Palmer and Mamquam, which had higher water flows as compared to below normal levels in 2015. These increases were partially offset by reduction at Manchief, due to reduced dispatch, and at the Navy plants, due to reduced availability. Waste heat production in Ontario was down approximately 3.9% from very high levels in 2015. Our 2016 forecast has assumed a reduction from 2015 levels, but results for the quarter were ahead of our expectations. Our Mamquam facility is benefiting from significantly higher snow pack this year than last. In addition, spring has come early and run-off is ahead of schedule. Slide 6 summarizes our 2016 planned optimization investments as well as capital expenditures related to PPA extensions. On the optimization side, we have not made any significant changes since our fourth quarter call in March. At Morris, we are in the process of adding past our capability to one of our boilers with commissioning expected late in the second quarter. The objective it to improve the reliability of steam delivery to the customer. We also plan to upgrade certain components for two of the gas turbines this year during the extended customer outage in late summer and for the third in 2017. This is being done in order to increase output and improve fuel efficiency from the turbines as well as enhance the reliability of steam delivery for the customer. Total optimization investments for this year are expected to be approximately $4 million with most of it for the Morris projects and the balance for spillway upgrade project at Curtis Palmer we have undertaken in late summer. On our March conference call, I indicated that we have budgeted approximately $7 million for CapEx related for repowering and PPA extension related investments at Tunis and Williams Lake, most of which was for Williams Lake. However, it now appears that there may be a delay in the availability of gas transportation for Tunis, which have affected timing of the restart of the project and therefore the timing of the required investment in the project to convert it to simple cycle operation. Accordingly, we have reduced our CapEx budget for this year, which includes the optimization investments to approximately $14 million from $16 million with most of the reduction related to Tunis. I would also note that whether we begin work on a new fuel shredder for Williams Lake this year, it depends on the timing of receipt of an amendment to the air permit currently expected in the third quarter or potentially subject to appeal and the status of discussions with BC Hydro on an extension of the existing contract. Initial outweighs for this project were approximately $6 million of our capital expenditure forecast for this year. We will provide an update on the timing of that investment on our second quarter call. I will close by providing a brief update on our efforts to extend our PPAs. We are continuing to aggressively pursue opportunities to extend or renew our existing PPAs in California. Due to non-disclosure provisions in the more formal processes, we cannot provide any detail on our efforts or specific bids. The PPA market is difficult, but we believe that our assets, particularly those in San Diego are well positioned to continue to provide necessary capacity close [indiscernible]. At Williams Lake, as I mentioned earlier, we expect to provide more of an update on our second quarter call. Now I will turn it over to Terry. Terry Ronan Thanks, Dan, and good morning everyone. I will begin with a review of our first quarter results, then discuss our refinancing transaction and close with an update on our guidance. Turning to slide 7, as Jim mentioned, results for the first quarter were in line with our expectations. We reported project adjusted EBITDA of $62.5 million, up $3.9 million from $58.6 million in the year-ago period. The 2015 results excludes our Wind business, which we sold in June of last year. The increase was primarily attributable to higher water flows in our Curtis Palmer and Mamquam hydro projects and lower expenses in our unallocated corporate segment. This was partially offset by a stronger US dollar, which reduced results by approximately $3 million. Slide 8 shows our cash flow results for the first quarter of 2016. The 2015 numbers are presented excluding the Wind business, which contributed $10.8 million of operating cash flow in the first quarter of last year. On a continuing operations basis, as shown on the slide, operating cash flow increased $5 million to $29 million from $24 million a year ago. The increase was primarily attributable to higher project adjusted EBITDA and lower interest payments resulting from the redemption of our 9% senior unsecured notes last year and continued amortization of the APLP term loan. Adjusted cash flow from operating activities, which excludes changes in working capital and severance and restructuring charges increased $6 million to $37 million from $31 million, again due to higher project adjusted EBITDA and lower interest payments. Adjusted free cash flow, which is after principal payments on the APLP term loan and project level debt increased approximately $8 million to $11.8 million from $3.9 million a year ago. This increase was attributable to higher adjusted cash flows from operating activities and receipt of cost reimbursement for customer-owned construction project, which helped cash flow by $4.7 million. These positive factors were partially offset by higher debt repayments on the term loan and project level debt of $27.5 million versus $23.8 million in the year-ago period. Slide 9 summarizes the key aspects of the refinancing transactions that we completed last month. We refinanced our existing APLP term loan with a new $700 million term loan at APLP Holdings, which has a maturity date of April 2023, two years later then the maturity of the term loan that replaced. We used 112 million of the proceeds to call all of our 2017 convertible debentures. After that redemption closes on the May 13, we will have no remaining corporate debt maturities prior to our next convertible debenture maturity in June 2019. Net proceeds remaining after paying transactional related fees are probably 105 million which are available to us for debt and equity purchases as well as growth investments. Debt reduction remains a very high priority for the company and we plan to use at least 65 million of the proceeds for the repurchase of 2019 convertible debentures. Although the initial impact of the refinancing was to increase our leverage to approximately 6.4 times from 5.8 times at year-end 2050, we expect to drop below 6 times by the end of this year due to the additional convertible repurchases I mentioned and to amortization of new term loan. As shown on slide 10, as part of this transaction, we also closed on a new 200 million revolving credit facility which replaces our previous 210 million revolver. The maturity date of the new facility is April 2021, a three-year maturity extension versus the one it replaced. The new revolver is a more traditional one and we can use it for general corporate purposes subject to certain limitations. It does provide us more flexibility to fund growth both internal and external including acquisitions. Slide 11 provides some additional details of the new term loan, two features of which I’d like to elaborate on. First interest-rate, the spread is 500 basis points over LIBOR as compared to the rate on the previous term loan of L+375. The LIBOR portion of the rate is a minimum of 1%. We’re required to fix a certain portion of our floating rate exposure through interest rate swaps for the 90 days of closing and that’s something we’re working on now. We expect the all-in rate will be approximately 6.25% to 6.50% as compared to slightly less than 5% on the previous term loan. Second, amortization, the term loan has a 1% mandatory annual amortization just as the previous term loan did. Repayments under the cash sweep works somewhat differently however, each quarter the amount of debt repayment is determined by the greater of a 50% cash sweep for the amount of repayment required to achieve the targeted quarter-end debt balances specified in the credit agreement which declined over time. Thus the minimum is 50%. We expect the cash sweep to average at 65% of 70% over the life of the loan, although it is higher in the early years and there was a fair amount of variability year-to-year but that target schedule envisions that approximately 80% of the loan will be paid down by maturity through mandatory and targeted amortization. Although the interest rate and debt repayment terms are less favorable than under our previous term loan, we believe these considerations are far outweighed by the positive aspects of this transaction as Jim indicated. Specifically we’ve extended the maturity of the term loan and revolver to 2023 and 2021 respectively, remove the overhang caused by the near term maturity of 2017 converts and obtain greater flexibility regarding revolver use of proceeds. We view the more aggressive debt repayment schedule into the new term loan as consistent with our goal of further deleveraging. In addition, we completed a tax restructuring concurrent with the closing of the refinancing moving both Atlantic Power Generation and Atlantic Power Transmission into the APLT structure which we believe will help us make more efficient use of our NOLs going forward. On the bottom of slide 11, we presented our current debt maturity profile split between both maturities on the left and amortizing debt on the right. Pro forma for the transaction and redemption of the 2017 convertible debentures approximately 67% of our debt is now amortizing rather than bullet maturities. Slide 12 provides details on each of our debt instruments and preferred securities including where in the organization they reside maturity date and interest rate. The changes arriving from the refinancing transaction are highlighted in yellow, separately I would note that during the quarter we repurchased 18.8 million principal amount of convertible debentures, primarily those with 2019 maturities under our normal course issuer bid. Slide 13 presents our liquidity at March 31 2016, both on an actual and pro-forma basis, several items of note. As I mentioned on the year-end call in March, we received approximately 6 million in cash in February representing a reimbursement for a customer owned construction project that we undertook on their behalf. We’re also able to reduce our letters of credit posted by 10 million following S&P’s upgrade of our corporate credit rate into B+ in February. During the quarter we used cash to repurchase convertible debentures and common shares under the NCIB. Thus we ended the quarter with 178 million of liquidity including 64 million of unrestricted cash. The pro forma column in slide 13 adjust for the refinancing transaction. Cash is increased by 105 million of net proceeds. However this is partially offset by the 10 million reduction in capacity under the new revolver and increased letters of credit associated with their larger debt service reserve requirement because of the large size of the term loan. On balance, our liquidity is approximately 86 million higher at 263.5 million including 169 million of cash. As we previously indicated, we believe that a base cash reserve of 50 million to 60 million is adequate for our business. Slide 14 presents our 2016 guidance updated to incorporate the impact of the refinancing transactions to our cash flow metrics. There is no impact on our project adjusted EBITDA guidance and we still expect to be in the range of 200 million to 220 million. Relative to our previous guidance, we expect cash interest to be higher as a result of a wider spread and the larger side of the new term loan partially offset by interest savings associated with the redemption of the 2017 convertibles and other debt reduction. Accordingly, we’ve lowered our guidance for adjusted cash flows from operating activities by 15 million, most of which is attributable to higher cash interest payments. The revised range is 95 million to 115 million. The other impact of the refinancing is on our adjusted free cash flow metric which is after debt repayment. We expect the higher level of amortization under the new term loan. In the first quarter, we amortized 25 million of the previous term loan and we expected to be amortize approximately 57 million to 60 million for the full year. In contrast, under the targeted sweep positions of a new term loan, we expect to repay through mandatory amortization the sweep approximately 60 million in the remaining nine months of this year representing an increase of approximately 25 million relative to previous expectations. Accordingly, we have reduced our adjusted free cash flow guidance by 40 million driven by higher interest payments and higher debt repayment. Our revised guidance is a range of negative 20 million to zero. Our adjusted cash flow from operating activities is what we focus on when we think of cash flow metrics. The guidance for adjusted free cash flow is based on us paying off 96 million of principal which helps us meet our deleveraging priorities. As Jim discussed elsewhere in his remarks, the refinancing leave us in a position we have more liquidity to debt repurchases, equity repurchases and capitalize opportunities we are pursuing. Slide 15 is an update of the guidance bridge that we typically provide for project adjusted EBITDA to our cash adjusted cash flow metrics. As I just discussed, the primary changes are higher interest payments and higher debt amortization partially offset by a slightly lower CapEx forecast. Now I will turn the call back to Jim. Jim Moore Thanks, Terry. We are an important turning point for Atlantic Power Corporation. In the past two years, we have one, paying executive management, two, refresh the board, three cut corporate overhead in half, a reduction of $27 million, four reduce debt by $879 million and interest expense by $65 million prior to the impact of the term loan financing, five resolve all pending shareholder litigation without having to make any cash payments to plaintiffs, six, sold off one quarter of our assets at a good price and use the proceeds to redeem our most expensive debt thereby removing our exposure to volatile win results and the overhand of a 2018 maturity, while still realizing a slight benefit from our ongoing cash flow. Seven, we eliminated common dividend to free up cash for uses such as debt repurchases, equity repurchases and investments in our fleet. Eight, invested $22 million in discretionary capital upgrade to the fleet, which we expect will generate approximately $10 million this year in tax returns. Nine, we brought an EVP of Commercial Development with power and energy storage expertise. Ten, we closed four of our offices and consolidated the corporate staff into one office. We moved that office from Boston’s financial district to that of Massachusetts. We also reduced corporate staff from 109 to 48. Eleven, we negotiated 11-year extension of our PPA at Morris. The first PPA extension in more than two years. The changes to that PPA are modestly accretive to expected projected adjusted EBITDA, project adjusted EBITDA. Twelve, refinanced our term loan and corporate revolver despite very difficult markets for energy companies, which resulted in longer terms for both, increased liquidity and additional flexibility. Although, additionally this will result in increased debt and interest expense, we expect both the decline over time as a result of debt repayment using our cash flow. Thirteen, we restarted our external growth efforts. Fourteen, insiders have been making significant equity purchases in these open market. As a result of these efforts, we are in a very different place than we were two years ago. On the defensive side, we have a much improved balance sheet in terms of leverage ratios and maturity profile. Our leverage ratio has improved from 8.9 times at year end 2013 to 6.4 times on a pro-forma basis for the refinancing transaction. We received $645 million of debt maturing in 2017 and 2018, leaving us with a manageable medium-term maturity in 2019 and the longer term maturity at 2036. As a result, our corporate credit rating has been upgraded by both Moody’s and S&P. We expect to further de-lever by amortizing debt from our strong operating cash flows. Our guidance is midpoint $105 million and using a portion of our liquidity to further redeem or repurchase debt. The power business is in the midst of a downcycle today. We can’t predict how low or how long it will go. So our best defense has been to reduce debt, reduce interest payments and overheads and extend our debt maturities. We expect our improved balance sheet and maturity profile will put us in a much stronger position to ride through the downcycles in energy and power markets. This allows us to be patient and disciplined on PPA renewals or asset sales. On the PPA front, we’re engaged in discussions across the fleet, particularly for those projects for which PPAs are scheduled to expire in the next several years. It is a difficult pricing environment, so we are being disciplined. We’ve had a poor outcome on Selkirk at a disappointing one at Tunis, but a good result at Morris. Although we can’t provide much guidance on PPA renewals in advance of reaching agreements, we are cautiously optimistic. We expect this to play out over the coming quarters and years. On the offensive side, we remain focused on growth in intrinsic value per share. That’s growth in absolute terms. We have approximately $700 million of debt and equity securities that we view as attractively priced. Repurchase of these at or near current levels carries more certain returns than those available on M&A markets. The refinancing transaction puts us in better position to undertake these repurchases. In addition, we see the potential for growth through internal investments in our own fleet. As we ramp down on discretionary optimization investments, we will be increasing our focus on PPA related investments or repowering projects. Some of these internal investments can be funded with operating cash flow pre-sweep and other larger projects at some of our plants can be funded by borrowings under the revolver. Between repurchasing securities and making internal investments in the fleet, we have more traffic uses than we had discretionary capital. We are reviewing the best options for deploying the $105 million in net proceeds from the refinancing. We are targeting the use of the leased $65 million for repurchase of 2019 convertibles. Further deleveraging of the balance sheet is an important priority. As always, our capital allocation decisions will be made with price to value relationships being the determining factor. Now, looking at external growth, given the returns in risks of external M&A markets for power generation versus what we see for internal investments, we’re still highly focused on growing intrinsic value per share organically. However, power asset markets tend to be volatile. This management team has had its strong record of investing and selling at a counter cyclical manner. The management team members also have had success in building IPP businesses in early mover ways since the 1980s with the most recent being a wind energy growth strategy at another company in 2001 through 2008. We are looking for undervalued assets that are too small for the average or large size M&A players, but are significant enough to move the needle for us. We will be disciplined, patient and optimistic in that effort — opportunistic in that effort. We are also looking at capital light early mover opportunities such as energy storage, but we have nothing specific to report yet. We also now have improved liquidity to capitalize on the growth opportunities that we identify, including proceeds from the recent refinancings that are available to us for security repurchases, internal and external growth. The new $200 million revolver is also more flexible with respect to financing debt repurchases for growth investments as Terry discussed. As I began my remarks by saying we have reached the turning point, we have taken the key steps necessary to strengthen our financial position, reduce near-term maturity risk and remove the overhang of litigation. We believe that we are now not only in a much stronger defensive position, but we are credibly positioned to allocate capital to debt reduction, share repurchases, internal capital expenditures and capital light external investments. The refinancing provides us with the dry powder we need for those purposes. As we have for three decades, and as we did at Atlantic Power with the timely sale of or wind business and the redemption of our high yield notes, we will be disciplined and patient, punctuated by occasional bold moves and a sense of urgency when the math is compelling for our shareholders. We won’t try to make genius decisions, as the management team to tell you genius is well outside my circle of competence, but our goal is to make rational decisions, even in unpopular and patiently build value over the long haul. If you are a patient, value oriented investor, the management team is likeminded. From here, it is all about continued execution. That concludes my prepared remarks. We are now pleased to take any questions you may have. Question-and-Answer Session Operator [Operator Instructions] Our first question comes from Rupert Merer of National bank. Please go ahead. Rupert Merer Good morning, everyone and thanks for all the detail so far. On the PPA renewals, you touched on that briefly and I realize there is probably not much more information you can give us, but can you provide some thoughts on the outlook for your Ontario projects, the Kapuskasing and North Bay projects. I think those are your next contract expires in December later this year? Dan Rorabaugh Sure. This is Dan Rorabaugh. Happy to. You are right, they do expire at the end of next year. And as we’ve discussed in past calls, there was a report on non-utility generators that came out last year that was essentially very negative to the idea of renewing these PPAs, but these projects do have value in particular, Kapuskasing and Calstock were called out as being important to local reliability. We’ve approached the idea, so and the OEFC and we are actually in discussions right now with alternatives to extract some of that value and get some value back to them and to us in terms of sending those PPAs. Rupert Merer And is it likely that they would need some sort of capital reinvestment before you would get a contract expiry and is that something you consider in your long-term capital plans? Dan Rorabaugh We do consider the kinds of investments that we would be looking at are more in the course of the normal gas turbine maintenance kind of investments and not large capital expenditures. Rupert Merer Okay, great. And then secondly, you’ve talked a little bit about the M&A market and your focus on organic growth and deleveraging. I understand it may not be the best market for an asset seller. Are you still contemplating select asset sales for debt reduction or capital recycling? Dan Rorabaugh It’s not a great market for an asset buyer. So we look at the returns that are clearing the market when you go out and buy assets and then we’d look at the returns we can get on our old balance sheet and/or investing in our old fleet. And even the returns on the debt are pretty closer to returns you could get in investing in external M&A markets and of course the returns are a lot more certain. And then the returns we’ve gotten from our discretionary CapEx is much better than what’s available on the external M&A markets. We sold a quarter of the business last year and this management team has sold large counts of businesses and demerge businesses and sold entire companies before. So we’re always actively looking at buy and sell opportunities and we’re happy to do those when it makes sense. We ended any large-scale book set, selling assets when we sold off the wind projects, but we do look at individual offers on individual assets as things come up and we consider that as part of our long-term planning, but we don’t have anything we can update you on today. Operator And our next question comes from Sean Steuart of TD Securities. Please go ahead. Sean Steuart Thanks. Good morning, everyone and thanks for all the detail. Question on the revolver, I know there is a lot more flexibility post the refinancing activity, but you mentioned some limitations on use, can you go into detail on what that would pertain to? Terry Ronan Sure. I can give you a couple of things, Sean. First of all, the biggest qualifier is we can use the revolver which were in the covenant compliance which is always the case I guess. Secondly, we are able to use the revolver for debt purchases of the converts. However, there is cap on that usage of $100 million and that we are not able to buy back equity or preferred using the revolver proceeds. And then finally, we can use the revolver for growth purposes. Sean Steuart Okay, thanks. Terry Ronan On a general corporate basis. Sean Steuart Got it. And of the $105 million of net proceeds you said $65 million towards convert repurchases I presume that’s all the December 2019 that you’d be focused on correct? Terry Ronan I would say that we haven’t completely determined what that’s going to be, the number will be at least $65 million. We will be looking at both series potentially a combination of both, but we haven’t fully made that decision yet. Sean Steuart Okay. Rest of my questions were addressed. Thanks very much. Terry Ronan Thanks, Sean. Operator And our next question comes from Ben Pham of BMO. Please go ahead. Ben Pham Okay, thanks and good morning everybody. I may have missed this at the beginning some of the commentary. On the credit facility, the new credit facility, it seems like there’s quite a dramatic interest rate and even size relative to maybe some of your initial commentary on that and I’m wondering from your side in your discussions with the debt investors and the credit, what was kind of the main issues they had. I mean you secured more assets on the debt and you spent like you said a good job of paying down debt over time. I am just wondering what were folks concern about your discussions with them as you move through your process? Terry Ronan Well, there is lot of questions there. Let me try and walk through that here, Ben. One, the interest rate is obviously higher. We can’t call the market, we wish it was lower, but that’s the market where it is today. We talked about the reasons why we think that that this is a good transaction for us because it expands the maturities, it also allows us more flexibility. It removes the 2017 overhang. So those are the good things. If you look at where the lenders were coming from if I had to step into their shoes for a moment, I think their concern was ensuring that the overall outstandings were amortized down by maturity to somewhere in the $125 million range which would be approximately 80% of the principal amount of the $700 million. Thus we have the introduction of the greater of 50% sweep for these targeted debt levels which is the equivalent of a 65% to 70% sweep. It’s a little lumpy as we go over time with that. And that’s just a market. That was the market that we faced. It was a difficult market. The market has been difficult since last summer, but it was important to us when the window opened and there was an opportunity to do this that we do it particularly with the first of the 17s coming due in March of 2017. And it has also allowed us to extend the revolver into a five-year facility out to 21. So from our perspective it’s a very good transaction. The positives outweigh the negatives. Jim Moore This is Jim Moore. I think I heard you ask something too, I will try to add answer maybe you didn’t ask it, but I will answer it anyhow. But so we got done with the sale and then high yield redemption and in that case I think we really kind of [indiscernible] the market, but that kind of timing is usually locked, not prescience and we went right to work on the TLB side of it. It takes a while to get everything and put together. So we weren’t making a market judgment call at that point. We were going as fast as we could. When we were ready to go market things had gotten very dicey in the energy markets, so our advice was to – from our financial advisors was to deposit that and when we saw the market opening up a bit, we went back out with this transaction. The feedback we got was very good. The fact that we were able to raise $700 million in this kind of environment I think was every good. But some of the people on the debt side felt very good about the credit that they were looking at although we were facing a market where across-the-board people are trying to reduce high yield energy and power market exposure. So we were – I think the clean insured and a bunch dirty shirts sectors so we didn’t make a judgment to try to play games with the market. We got ready to go as quickly as we could. And then we had opportunity we went. The rates obviously have moved up since the last refinancing and we didn’t touch the bottom of the rate cycle, but we think overall the rates not a bad rate on a historical basis. We do have the higher sweep, but with the 17s fast approaching we didn’t want to make the perfect enemy of the good. So instead of sitting near and waiting for the opportune time or trying to play to markets a bit on rates, we decided let’s go ahead and do this deal because it eliminates the 17s. When I showed up in January, the big concern I had about this company was we had three walls of debt coming at us, we had a wall of debt in 17, we had a wall of high yield. That cost us 9%, that was coming at 18 and then we had to convert to 19. With the completion of this refinancing we’ve now once we redeem the ’17 to May eliminated the 17 wall, eliminated the 18 wall, as Terry pointed out we are on a good path for 19 wall. So all of that was important to us that we not get too cute on trying to play the rates. We were viewed as the strong credit which enabled us to go get this $700 million with increased flexibility. Another important thing in addition to avoiding the 17 by getting too cute was that the revolvers are difficult to replace in any market particularly this market and we came out with a very good outcome on the revolver. So in addition we extended the term of the revolver, we extended the term for the TLB and even after the higher suite with this $105 million to allocate to debt, equity and internal uses, so we would have preferred to have gotten more rates or hit the bottom of a market, but I think we were very well received which allowed us to raise a total of $900 million of debt in debt revolver in a very difficult market. And I’m actually very optimistic at this point about being able to get off our back foot and as a theme of my remarks was go from a – completely defensive mode to where we can play a little bit of offense. And we don’t need tons of liquidity. I mean our market cap is $310 million or so, so we don’t need tons of liquidity to make meaningful debt repurchases or common repurchases or investments in capital. And if you look at our $105 million with the new more flexible $200 million revolver and a cap that we already have on the balance sheet for working capital, we think our liquidity positions is now very strong relative to the opportunity sizes that we see in front of us. Ben Pham Okay, thanks for the color. And the only other thing I want to check on looking through the slides, the covenants in slide 27 specifically and it looks like you expected to I guess get down to 4.25 times leverage here at about 6 today, does that contemplate any change in PPA re-contracting rates or you feel like you are factoring that in, but maybe there’s some positive offsets that looks like you think the 80% debt profit today look likes it’s [indiscernible] what you are seeing in this year. You can add bit more color there. Terry Ronan So it does assume that in those numbers, but at a very conservative re-contracting assumption. Ben Pham Okay, so you are assuming some decline, but is that what you said? Terry Ronan Yes, that’s exactly what I said. Ben Pham Okay, all right. Thanks everybody. Terry Ronan Thank you. Operator [Operator Instructions] Showing no further questions, I would like to turn the conference back over to the management team for any closing remarks. Jim Moore Okay. Well, thank you for your time and attention today and your continued it interest in Atlantic Power. We look forward to updating you on our progress on our next conference call in August. Thank you. Operator Thank you. And everyone have a – today’s conference has now concluded. We thank you all for attending today’s presentation. You may now disconnect your lines and have a wonderful day. Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. 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